Mountains of Debt on The Move

22.07.2021, Tomasz Konicz
The wonderful world of bond markets – currently far more exciting than many functionaries in the state and financial sector might like.

Dull, dreary, mind-numbing – these are usually the words used to describe the bond markets of the core of the world system. When capital needs to be parked safely, when pension funds need to guarantee a secure, albeit low, return, when insurance companies want to park their money, then money flows into US government bonds or into German bonds, which are considered the stable foundation of the world financial system, the backbone of the neoliberal financialization of capitalism in recent decades.


When measuring the concrete on which the neoliberal financial house of cards has been built over the past decades, the trillion is the appropriate unit of measurement: with a volume of more than 22 trillion dollars, the American market for government bonds had the largest volume worldwide at the end of 2020, followed by China (20 trillion) and Japan (12 trillion).[1] Globally, a total of $128.3 trillion worth of bonds were traded during the period, of which 68 percent was public sector debt and 32 percent was corporate debt.

It’s usually more exciting to watch grass grow than to watch the US Treasury bond markets. Usually. The fact that the financial sphere is in the midst of what is, to say the least, an unusual crisis that is eroding its very foundations can be gauged precisely by the fact that bond markets in the US and the EU have been on the move and are in the midst of a nerve-wracking rollercoaster ride for investors large and small. There has seldom been so much tension and action on the bond markets, which are comfortable by capitalist standards and last came under similar pressure in the EU around ten years ago during the euro crisis.

The difference in interest rates, the so-called spread between German and Italian government bonds has risen sharply in recent weeks. Rome has to pay higher interest rates for its government bonds than Berlin, which threatens to make Italy’s enormous debt burden, which stands at around 150 percent of its economic output, unsustainable – and could blow up the entire Eurozone.[2] The ECB finds itself at an impasse due to galloping inflation and unsustainable debt burdens in the southern periphery of the Eurozone, because it would actually have to raise interest rates to fight inflation and at the same time lower them to keep the debt burden in the currency union bearable.

In the US, observers had to look further back to find parallels with the massive shifts in the sovereign debt market. In the market for US government bonds, for so-called Treasuries, a rare constellation known as an inverted yield curve[3] can be observed, which serves as a safe indication of a coming recession. Yields on long-term bonds, such as the 10-year Treasury note, have fallen below yields on short-term T-bonds, such as Treasuries with two-year or even three-month maturities.[4] Usually, long-term bonds carry higher interest rates than shorter-dated notes to compensate for the greater risk.

If bonds with short maturities are now considered just as risky as T-bonds with maturities of ten years, then this points to a coming major shock, to an approaching crisis push. Over the past 50 years, this market constellation has always preceded a recession. According to the Financial Times (FT), this inverse yield curve is as pronounced in the US bond markets as it was in 2000, when the global dot-com bubble burst with internet and high-tech stocks.[5] Thus, the US bond markets in particular seem to be sending a sure recession signal.

On average, US Treasuries, which trade at a market price similar to equities, have lost about nine percent of their value since the beginning of the year,[6] the biggest correction in this typically solid market in about 30 years. The US bond market is all but dead, lamented the Financial Times in mid-July,[7] as Washington’s long-term T-bonds are now being “shunned” by strategic investors such as pension funds, leaving their yields higher than those of 30-year bonds. This, too, is an inversion that is already attracting speculators such as hedge funds to the market to exploit these “distortions” (FT) – and further destabilize the market.

Moreover, the falling prices of US bonds are causing foreign investors to think very carefully about whether Washington’s Treasuries are still a fireproof investment.[8] Japan is now the largest foreign creditor of the United States – ahead of China – with Japanese investors holding $1.2 trillion worth of US bonds. As reported by Bloomberg news agency, net sales of US bonds in Japan have been taking place for seven months in the face of falling prices, setting a new record since record keeping began. The largest foreign creditor to the US is said to have dumped $2.4 billion worth of Treasuries in May alone, with sales as high as $17 billion in April. If these outflows accelerate and more of Washington’s foreign creditors do the same, the Fed could face a full-blown debt crisis.

Falling bond prices go hand in hand with rising interest rates, which tend to approach the interest rate level of the central banks. However, the Fed’s interest rate hikes, which are intended to help fight inflation, are also accompanied by an increase in the cost of servicing sovereign debt. The higher the interest rates, the greater the government’s interest burden. Even in the FRG, the cost of servicing the – relative to the south of the Eurozone – lower and cheaper mountains of debt has increased almost eightfold within a short time: from just under four to just under 30 billion euros.[9] The era of negative interest rates is finally over, although, as explained above, it is precisely the bond markets that are contributing to the destabilization of the currency union due to the increasing differences between the interest rates of the German core and those of the southern periphery of the euro area, and which could lead to it breaking up should the crisis escalate any further.

In the US, right-wing forces within the Democratic Party have already exploited the Fed’s interest rate turnaround to massively cut the Biden administration’s infrastructure and stimulus programs.[10] There is nothing left of the flowery campaign promises of a credit-financed Green New Deal. Conservative think tanks are already arguing[11] that even Biden’s minimal stimulus programs should be sabotaged, as they are pro-inflationary and a burden on the middle class. Inflation has already risen to 9.1 percent, the Heritage Foundation complained, due to the Fed’s “printing” of an incredible amount of money that adds up to some seven trillion dollars.

In addition to this conservative critique of the loose monetary policy of recent years (which was also practiced by the Trump administration) ignoring the environmental and pandemic factors contributing to the current wave of inflation,[12] it omits the simple fact that it was precisely the historically unprecedented period of expansionary monetary policy by central banks that kept the economy and the financial sphere afloat in the context of a gigantic liquidity bubble.[13] The capping of stimulus measures, as is happening in the US, is thus likely to deepen the coming recession.

This dead end of bourgeois crisis policy,[14] where central banks can only choose between recession and inflation, only between the concrete paths to the next episode of crisis, is now being openly addressed by leading officials in the financial industry. Analysts at Bank of America (BoA) stated in a market assessment at the beginning of July that it would take a very “deep recession” to contain inflation.[15] It would take “a long time” to “cool down the labor market” and contain “inflation driven by labor costs,” the BoA forecast said. In plain English, unemployment must rise significantly to depress wages, which rose in the era of “cheap money,” generating demand and exacerbating pandemic supply shortages. The “market equilibrium” between demand and supply, which was shattered by the pandemic and the climate crisis, is thus to be restored via the pauperization of wage earners – so that full supermarket shelves and shop windows can once again be wistfully admired by wretched figures.

The great flood of money from the central banks, which had actually already opened their floodgates wide in 2008 after the bursting of the real estate bubbles in the USA and the EU and hardly closed them since,[16] led to an inflation of securities prices in the financial sphere. And it was precisely this financial bubble economy that provided for the “good” economic development generated on credit, which is now “overheating” in inflationary terms. It is precisely the inflation of the prices of the speculative objects in the financial sphere that is at the core of the definition of a bubble. And since it was the liquidity of the central banks, with which the financial markets were flooded, that led to the formation of this “inflation of securities prices,” this speculative dynamic, which is now bursting, is called a liquidity bubble.

In the Financial Times[17] this connection between the flood of money and the financial market boom is now openly discussed: According to the paper, the liquidity pumped into the markets since the beginning of 2020 has had a “twofold to 2.5-fold” greater impact on the performance of the stock markets than the dismal economy. Investors are thus far more concerned about the drying up of liquidity in the wake of the interest rate turnaround than they are about the growth outlook.

The central banks’ turnaround on interest rates is not only causing the mountains of debt in the bond markets to move, but the stock markets,[18] the currency markets,[19] and the real estate market[20] are also all affected. The liquidity bubble of the central banks, which have been pursuing a zero interest rate policy almost without interruption since 2008 and have pumped trillions into the financial sphere by means of securities purchases, has in fact developed into an everything bubble, which has promoted the formation of bubbles in many areas of the financial sphere – up to and including the absurd excesses of swarm speculation with meme stocks such as Gamestop.[21]

The current upheavals in the financial sphere, the turbulence in many markets, which seem so confusing at a cursory glance, can certainly be reduced to a common denominator that makes these crisis dynamics understandable: the aforementioned liquidity bubble, which has been pumped up by central banks since the financial crisis of 2008. To prevent the economy from crashing after the 2008 and 2020 bouts of crisis, central banks pumped money into the financial sphere by buying up junk securities like mortgage securitizations or the government bonds of their sovereigns, leading the financial sphere into a long speculative boom accompanied by short bouts of shocks. This Everything Bubble is bursting after the outbreak of the pandemic and the war over Ukraine, as the liquidity held in the inflated financial sphere increasingly flows into the “real” economy, accelerating price inflation there, which could reach double-digit rates of increase in the US.

The global turnaround in monetary policy by the central banks is taking place – this is characteristic of capitalism – not in a coordinated approach, but in competition with each other, which is an expression of the usual late-capitalist crisis competition between “economic localities.” According to the Financial Times, there are increasing signs of a “reverse currency war” between central banks, with each country’s monetary policy seeking to contain the “import of inflation.”[22] The Fed’s interest rate hike has put many central banks “under pressure” to follow suit, as it has caused the US dollar to appreciate against the currencies of other currency areas, such as the Eurozone. However, a depreciation of the currency makes imports, such as of energy sources, more expensive, which fuels inflation. This is why the ECB recently decided to keep its key interest rate at 0.5 percent, despite the friction within the economically divided eurozone,[23] so as not to fall behind in the revaluation race with the USA.[24]

The central banks of competing countries must therefore follow suit in this revaluation race if they do not want to literally import inflation. This currency war is in fact the reverse of the devaluation races that were common in the late phase of neoliberal globalization, after the bursting of the real estate bubbles in 2008.[25] At that time, states sought to achieve export surpluses through monetary devaluations in order to literally export the systemic overproduction crisis of capital, following the German model. These devaluation races, in which China and the FRG were so successful, turned into open protectionism when the Trump administration took office.

How far can these revaluation races of the central banks, which begin with a period of inflation, be pushed? The functional elites who are in a dead-end situation,[26] who initiate this revaluation race, are well aware that it will bring great social and economic friction. Actually, monetary policy has no choice but to at least try to let the devaluation process run its course if inflation is not to get completely out of control. The “economy” and especially wage earners will suffer. The turbulences and distortions in the financial sphere are also far from over, the crisis is far from being “priced in.” Much, even the threat of state bankruptcies in the periphery,[27] can certainly be managed and sat out without the collapse of the capitalist world system as a whole. The social fallout of the crisis can, to some extent, be held in check militarily.

But the seemingly boring bond markets in the core of the world system – in the EU, Japan and the US – cannot simply collapse without the current push of crises taking a collapse-like course. That is the objective limit of all appreciation races and all inflation battles. The mountains of debt that have started to move must be prevented from burying the crisis-ridden core beneath them in an uncontrollable avalanche.

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Originally published on on 07/22/2022

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